Critical Issues for Future Development in Chinese Stock Market - Case Study Example

What are the critical issues for future development in Chinese stock market? Introduction The Chinese stock market is divided into two segments. First is the Shanghai stock exchange which is situated in the city of Shanghai, China. It operates independently and holds the 6th largest equity market with capitalization of US$2.3 trillion till 2011(Shanghai Stock exchange, 2010). It became the most prominent stock market in terms of market value, trade value, turnover value, etc. Second is the Shenzhen stock exchange. It is situated in Shenzhen, Guangdong and started on 1st December, 1990 with market capitalization of US$2.2 trillion in 2015(Shenzhen Stock Exchange, 2013). In this paper, the critical issues for future development in Chinese equity market will be analyzed. Analysis will be based on the characteristics of the market, critical issues and future development of Chinese stock market. Discussion Characteristics of Chinese Stock Market The market has shown an overall growth with good contribution to the economy. This shows the major role of China’s equity and commercial banks in the banking sector and has a great potential in the stock markets. It also has great potential for the investors to grow rapidly. China’s different listed companies have emerged from the different regions and cities of China and especially from the eastern coast areas and the rest holds from the western and central areas. There are different structure of shareholding shares like state owned shares, foreign legal person shares, domestic legal person shares, staff shares and private placement of legal person shares (Lua and Abeysekera 2014). Critical issues of Chinese Stock Market The financial crisis in almost all the developed economies has crashed all the markets and therefore the market is going through a massive negative impact since a long time. The market decline with the financial crisis lead to slow growth rates in all the countries. The effect of crisis in banks in the richer countries and the upcoming markets has the same impact and there are same patterns in equity price and housing prices, government revenues, unemployment and debt. The developed countries were not liable for this crisis but they suffered and got affected (Wang and Hussain, 2010). There have been situations where the developing countries have got more affected than the developed countries. Here, it’s been discussed that affect of financial crisis on the economy of China realized government to form a new financial policy to overcome the global financial crisis. It was realized that no country was left from the effects of the crisis (Wang and Hussain, 2010). The overall recession targeted the developing countries in major sections like their unemployment rate, growth rate, inflation rate, GDP rate etc. They were mainly affected in terms of money and trade between buyers and sellers and this ultimately affected the balance of payments, trade balance and even foreign savings of many countries and some are already going through a debt crisis (Dorn, 2015). The Federal Reserve’s created an environment with a low interest rate has nevertheless over inflated the equity markets putting S&P to double its rate since 2009. If GDP growth of US is compared to China, in 2008 their volunteers came to action, putting the impact of financial crisis of 4 trillion packages. GDP growth got hit by 9.2% in 2009, 10.4% in 2010 and 9.2% in 2011. S&P performances remain up against the China’s stock market and specially the two main exchanges i.e. the Shanghai and Shenzhen and the whole scenario changed. The shanghai shares came down in November 2008, nearly 70% when compared to 2007 stocks value (Forbes, 2012). Since years, China’s Economy reached to annualized 10%, showing a GDP raise to 225% at that time, but the stock market showed a weak percentage that is 23%. This is the reason that China’s is lagging behind in growth and is not valued in the market. There are many investment challenges which are formed by China’s economy. This is because there are many agendas which state and corporate play in establishing economy. This says that to realise the exogenous forces and history in the market, and to develop a view on development path and Communist party’s, act as an fundamental for every investors. Overcoming of Critical Issues After a long time government realize that it should improve the economic condition and then it decided the three parameters upon which the economy will be developed i.e., to maintain a stabilized economic growth, to avoid social disturbances between people and to develop individuals’ ability to tackle the crisis. The problems are how to fulfill domestic requirements, how to give satisfaction over consumptions, which will lead to reliability on GDP growth in import export development. Too much of dependence on foreign reserves in case of urgent need will be a serious issue. After the financial crisis on the parts of Southeast Asian, the countries got too much dependent on foreign policy and trade. This means that people lost hope from their own economy and started depending on foreign projects and contracts (Jeon and Olivero, 2013). To fight with effects of crisis, the China government declared a fiscal balanced policy where major amount of expenses will go towards various projects and some towards social welfare. Many more actions were taken by the government like the cut of interest rate, Launch of Stock connect which gave hope to the investors and allowed retail traders to trade in the Chinese market by the non-Chinese people also. The Stock connect program for the market was a big hit. This program was able to raise the inflow of billions of dollars in international transactions and it disclosed the main financial markets in China. This also helped the international investors and the Hong Kong investors to trade stocks in the Shanghai Stock Exchange. The program was the main reason that let to return of 4.5% index (Jeon and Olivero, 2013). Future Development of Chinese Stock Market An individual investor knows only about its share of investment but the stock market consists of all the investment. The recent announcement of the new deposit insurance in last November and which will be implemented in New Year will automatically decrease the guarantee of China’s government high evaluating banking money. This gives a cheap look to China’s stocks by comparing with other products and accordingly now investors are bidding on them. Shanghai and Shenzhen markets together hold as one of the top active stock markets last year in the whole world. It was up by 40 percent, when compared to S$P 500 it gained only 10 percent and the major performance occurred from the starting of November 2014 (CNBC, 2015). This gain cannot be treated as unseen. This is not also a rumor, like wise investors should not get scared from another market crash. The research says that a happening first 10 years which made China’s stock market earned a reputation as a royal casino, stock prices which made everyone realized that china will make huge profits in the future and at same time they will make money in the U.S. However, these numbers are highly connected with China’s professional investment efficiency, indicating that stock prices are tutoring high level managers and main lessons also. In China, capital is entirely dependent on its huge banking sector. The time has come when China should form listing standards, allocate capital, maintain the approval process for IPO, and to open up the stock market (Dorn, 2015). Its financial structure is totally controlled by the banking sector and it is the key instrument of the central economy policy. China’s crisis in the future shows a banking expansion with an eruption in the stock market for money management products, mainly high yielding products. After years of restriction to only 3 percent deposit rates, China banks has raised their deposit rates to 7 percent which made investors to be at risk free with good amount of investment in return. This declaration pulled huge amount of money from the capital and stock market and lead to investment in the banks as banks provided good amount of deposit rates. This led to create bubble in the real estate market, slowing the economic growth and delaying in the post crisis recovery. China’s stock market future depends totally on government allowance of more than one capital so that the Chinese people can have foreign investment and foreign investors can invest in China which will lead to a competitive advantage with a standard rate of return rather than government commanding their own fixed rates. To make China the major player globally, it has to become fully independent and let state ownership form a private property rights by law (CNBC, 2015). As soon as Beijing makes its move into the market, it will reduce the transaction cost. Even the U.S. can support China by accessing it with the World Trade Organization and allowing them to be normal trading status. Premier Zhu Rongji’s even offered to open retail banking for foreign companies in the next few years and even asked them to hold up to a 50 percent equity stake in banks. Adding foreign money in the non state financial market will help the market to grow. This will ease the working of a fully private financial and banking sector. An individual saves approx 40 percent of their earnings in the People’s Republic of China, but people get technically lesser returns due to lack of deposit schemes and because of the change on the rate of interest by the state owned banks that have to pay on their deposits (Dorn, 2015). It is being observed that China requires a freedom in the market to improve, and not to form any more regulations for it. So, the only idea for China to improve or build a strong financial structure is to allow freedom of private ownership and even protect the right with proper rules and regulations. If someone tries to re capitalize, the State owned capital will be same as extinguishing fire with kerosene. It is required to drag out state out of the financial sector and not to put more money in it. There is an urgency to realize the actual costs of past poor performance and to develop or restructure banks than to lend money to State owned banks (Yao, Ma and He 2014). The connectivity link was launched between the Hong Kong stock exchange and Shanghai stock exchange on November 2014 named ‘Stock Connect’. This lowered the restrictions which previously divided the Chinese Stock market into shares targeting the international and local investors. This connectivity allow Chinese investors to buy and select Chinese and Honk Kong companies and allow foreigners to purchase Chinese shares which are listed in a more free way. The scheme resulted in huge profit in terms of turnover and market capitalization and ranked as one of the top market in the world. This will also increase the portfolio of investors, efficiency will increase and rapid growth will take place in Chinese stock market (Goldman Sachs, 2014). Conclusion After analyzing Chinese stock market it can be understood that China’s future is in the market itself and not in the plans. It is high time for Beijing to realize that the truth is to free Chinese people from the bondage of State owned Banks and allow them to experience freedom of investment. Analyzing the characteristics of the Chinese stock market, ways to overcome challenges, critical issues and future prospects, it has become prominent that government should put less interventions and let the market decide itself how it will expand and allow them to collaborate with foreign firms, encouraging foreign investments. Fan Gang, an economist from China Reform Foundation said that the banking sector should be allowed to expand their credit more towards the private sector, basically in honor of its importance to the economy. Private banking should be allowed. China’s basic structural and institutional reforms should always be continued in the stock market, no matter how adverse situation or consequences may arise. Reference List CNBC, 2015. Chinas stock market is not in a bubble. [online] Available at: [Accessed 2 May 2015]. Dorn, J. A., 2015. China’s Financial Future. [online] Available at: [Accessed 2 may 2015]. Forbes, 2012. Chinese Stock Market -- Buy In or Buyer Beware?. [online] Available at: [Accessed 6 may 2015]. Goldman Sachs, 2014. A major change is underway in the structure of the Chinese stock market - and by extension the global stock market. [online] Available at: [Accessed 6 May 2015]. Jeon, B. N. and Olivero, M. P., 2013. An overview: Global banking and financial markets in crisis. West Yorkshire: Emerald Group Publishing Limited. Lua, Y. and Abeysekera, I., 2014. Stakeholders power, corporate characteristics, and social and environmental disclosure: evidence from China. Journal of Cleaner Production, 64(1), pp. 426-436. Shanghai Stock exchange, 2010. Brief Introduction. [online] Available at: [Accessed 2 May 2015]. Shenzhen Stock Exchange, 2013. SZSE Overview. [online] Available at: [Accessed 2 May 2015]. Wang, L. and Hussain, I., 2010. Managing Financial Crisis: A Critical Review of China’s Policy. International Journal of Economics and Finance, 2(4), pp. 29-32. Yao, J., Ma, C. and He, W. P., 2014. Investor herding behaviour of Chinese stock market. International Review of Economics & Finance, 29(2), pp. 12-29. Read More